Handout Chapter 5

25) Dartmouth Corporation manufactures two models of office chairs, a standard and a deluxe model. The following activity and cost information has been compiled: Number of Number of Number of Product Setups Components Direct Labor Hours Standard 11 6 295 Deluxe 29 13 205 Overhead costs $60,000 $58,900 Number of setups and number of components are identified as activity-cost drivers for overhead. Assuming an activity-based costing system is used, what is the total amount of overhead costs assigned to the deluxe model? A) $59,450 B) $83,800 C) $56,800 D) $62,100

b

12) Extreme Manufacturing Company provides the following ABC costing information: Activities Total Costs Activity-cost drivers Account inquiry $420,000 14,000 hours Account billing $225,000 5,000,000 lines Account verification accounts $95,000 40,000 accounts Correspondence letters $46,000 8,000 letters Total costs $786,000 The above activities are used by Departments A and B as follows: Department A Department B Account inquiry hours 2,900 hours 4,400 hours Account billing lines 600,000 lines 450,000 lines Account verification accounts 12,000 accounts 10,000 accounts Correspondence letters 1,800 letters 2,200 letters How much of account verification costs will be assigned to Department A? A) $23,750 B) $28,500 C) $95,000 D) $47,500

b

5) Indirect labor and distribution costs would most likely be in the same activity-cost pool. Answer:

FALSE

Explanation: Indirect labor and distribution costs would not be in the same activity-cost pool because their cost drivers are very dissimilar. A cost driver of indirect labor would include direct labor hours, while a cost driver of distribution costs would include, for example, cubic feet of cargo moved. 6) Managers should look for evidence of cause-and-effect when choosing a cost driver with the driver being the cause and the effect being the cost incurred. Answer:

TRUE

1) Overcosting a particular product may result in: A) pricing the product too high B) pricing the product too low C) operating efficiencies D) understating total product costs

a

10) Extreme Manufacturing Company provides the following ABC costing information: Activities Total Costs Activity-cost drivers Account inquiry $320,000 16,000 hours Account billing $200,000 4,000,000 lines Account verification accounts $173,250 70,000 accounts Correspondence letters $24,000 4,000 letters Total costs $717,250 The above activities are used by Departments A and B as follows: Department A Department B Account inquiry hours 2,700 hours 4,200 hours Account billing lines 900,000 lines 750,000 lines Account verification accounts 8,000 accounts 6,000 accounts Correspondence letters 1,400 letters 1,800 letters How much of the account inquiry cost will be assigned to Department A? A) $54,000 B) $320,000 C) $160,000 D) $84,000

a

14) Extreme Manufacturing Company provides the following ABC costing information: Activities Total Costs Activity-cost drivers Account inquiry $280,000 14,000 hours Account billing $350,000 7,000,000 lines Account verification accounts $93,750 50,000 accounts Correspondence letters $29,000 4,000 letters Total costs $752,750 The above activities are used by Departments A and B as follows: Department A Department B Account inquiry hours 2,100 hours 3,600 hours Account billing lines 500,000 lines 350,000 lines Account verification accounts 7,000 accounts 5,000 accounts Correspondence letters 1,200 letters 1,600 letters How much of the total costs will be assigned to Department A? A) $88,825 B) $118,825 C) $120,000 D) $85,075

a

16) Activity-based costing is most likely to yield benefits for companies ________. A) with complex product design processes that vary significantly from product to product B) with operations that remain fairly consistent across product lines C) in a monopolistic market D) having nominal percentage of indirect costs

a

8) The fundamental cost objects of ABC are ________. A) activities B) cost drivers C) products D) services

a

LO #7 32) ABC and traditional systems are quite similar in ________. A) the treatment of direct costs B) the allocation of overheads C) evaluating performance D) the identification of cost pools

a

27) Canton Corp. manufactures two sizes of ceramic paperweights, regular and jumbo. The following information applies to their expectations for the planning period: Cost Pool Overhead Costs Activity-cost driver Materials handling $46,000 94,000 orders Machine maintenance $310,000 20,000 maintenance hours Setups $261,000 45,000 setups Inspections $132,370 21,700 inspections Total support costs $749,370 Production Estimates Production units: Regular = 8,000,000 units Jumbo = 16,000,000 units Machine-hours = 500,000 mh Labor-hours = 1,000,000 dlh Expected direct costs amounts to $942,000 for the period. Support cost requirements of both products are substantially different from one another. Canton uses an ABC costing system. The setups activity-cost driver rate is ________. A) $6.10 per setup B) $5.80 per setup C) $4.15 per setup D) $15.50 per setup

b

29) Nichols Inc. manufactures remote controls. Currently the company uses a plant-wide rate for allocating manufacturing overhead. The plant manager is considering switching-over to ABC costing system and has asked the accounting department to identify the primary production activities and their cost drivers which are as follows: Activities Cost driver Allocation Rate Material handling Number of parts $5 per part Assembly Labor hours $20 per hour Inspection Time at inspection station $10 per minute The current traditional cost method allocates overhead based on direct manufacturing labor hours using a rate of $20 per labor hour. What are the indirect manufacturing costs per remote control assuming an activity-based-costing method is used and a batch of 10 remote controls are produced? The batch requires 100 parts, 5 direct manufacturing labor hours, and 3 minutes of inspection time. A) $2.00 per remote control B) $63.00 per remote control C) $35.00 per remote control D) $630.00 per remote control

b

35) High Traffic Products Corporation has two departments, Small and Large. Central costs could be allocated to the two departments in various ways. Small Department Large Department Square footage 6,850 17,750 Number of employees 1,120 500 Sales $320,000 $1,740,000 If advertising expense of $432,600 is allocated on the basis of sales, the cost per cost driver rate would be ________. A) $0.2 per dollar of sales B) $0.21 per dollar of sales C) $0.23 per dollar of sales D) $0.22 per dollar of sales

b

36) Stark Corporation has two departments, Car Rental and Truck Rental. Central costs may be allocated to the two departments in various ways. Car Rental Truck Rental Number of Vehicles in fleet 880 450 Number of employees 125 60 Sales $700,000 $395,000 If administrative expense of $77,500 is allocated on the basis of number of employees, the amount allocated to the Car Rental Department would be ________. A) $38,750.00 B) $52,364.86 C) $25,135.14 D) $51,278.20

b

9) Which of the following statements is true of activity-based costing? A) In activity-based costing, direct labor-hours is always the best allocation base to allocate all non-manufacturing indirect costs. B) Activity based costing is more suited to companies with high product diversity than companies with single product line. C) Activity based costing broadly averages or spreads the cost of resources uniformly to cost objects such as products or services. D) The main advantage of activity-based costing over peanut-butter costing is the accurate distribution of all direct costs to the products.

b

LO #5 20) ________ is considered while choosing a cost allocation base for activity costs in ABC costing. A) Marketing strategy and material price level B) Availability of reliable data and measures C) Product price level D) Market share of a product

b

LO #6 30) Which of the following statements is true of ABC systems? A) ABC systems provide less insight than traditional systems into the management of the indirect costs. B) ABC systems are used by managers for strategic decisions rather than for inventory valuation in merchandising companies. C) Service companies find great value from ABC because a vast majority of their cost structure is composed of direct costs. D) ABC systems is valuable for pricing decisions but not for understanding, managing, and reducing costs in government institutions.

b

11) Extreme Manufacturing Company provides the following ABC costing information: Activities Total Costs Activity-cost drivers Account inquiry $320,000 16,000 hours Account billing $220,000 4,000,000 lines Account verification accounts $182,000 80,000 accounts Correspondence letters $25,000 4,000 letters Total costs $747,000 The above activities are used by Departments A and B as follows: Department A Department B Account inquiry hours 2,200 hours 3,700 hours Account billing lines 600,000 lines 450,000 lines Account verification accounts 5,000 accounts 3,000 accounts Correspondence letters 1,000 letters 1,400 letters How much of the account billing cost will be assigned to Department B? A) $220,000 B) $110,000 C) $24,750 D) $33,000

c

13) Extreme Manufacturing Company provides the following ABC costing information: Activities Total Costs Activity-cost drivers Account inquiry $390,000 13,000 hours Account billing $275,000 5,000,000 lines Account verification accounts $130,500 60,000 accounts Correspondence letters $22,000 4,000 letters Total costs $817,500 The above activities are used by Departments A and B as follows: Department A Department B Account inquiry hours 2,500 hours 4,000 hours Account billing lines 800,000 lines 650,000 lines Account verification accounts 9,000 accounts 7,000 accounts Correspondence letters 2,000 letters 2,400 letters How much of correspondence costs will be assigned to Department A? A) $22,000 B) $49,500 C) $11,000 D) $11,242

c

15) Extreme Manufacturing Company provides the following ABC costing information: Activities Total Costs Activity-cost drivers Account inquiry $750,000 15,000 hours Account billing $250,000 5,000,000 lines Account verification accounts $173,250 70,000 accounts Correspondence letters $42,000 7,000 letters Total costs $1,215,250 The above activities are used by Departments A and B as follows: Department A Department B Account inquiry hours 2,000 hours 3,500 hours Account billing lines 900,000 lines 750,000 lines Account verification accounts 9,000 accounts 7,000 accounts Correspondence letters 1,200 letters 1,600 letters How much of the total costs will be assigned to Department B? A) $282,460 B) $246,925 C) $239,425 D) $256,825

c

17) Milan Manufacturing Company has identified three cost pools to allocate overhead costs. The following estimates are provided for the coming year: Cost Pool Overhead Costs Cost driver Activity level Supervision of direct labor $539,000 Direct labor-hours 920,000 Machine maintenance $120,000 Machine-hours 1,000,000 Facility rent $215,000 Square feet of area 160,000 Total overhead costs $874,000 The accounting records show the Mossman Job consumed the following resources: Cost driver Actual level Direct labor-hours 300 Machine-hours 1,675 Square feet of area 70 If direct labor-hours are considered the only overhead cost driver, what is the single cost driver rate for Milan? A) $1.05 per direct labor-hour B) $0.59 per direct labor-hour C) $0.95 per direct labor-hour D) $1.71 per direct labor-hour

c

19) Which of the following ordering of the levels best depicts the cost hierarchy within an ABC system? A) batch-level, output unit-level, product-sustaining level, and facility-sustaining level B) batch-level, output unit-level, facility-sustaining levels, product-sustaining levels C) output unit-level, batch-level, product-sustaining level, and facility-sustaining level D) facility-sustaining level, output unit-level, batch-level, product-sustaining level

c

2) For a company with diverse products, undercosting overhead of a product will lead to product-cross -subsidization which means that: A) direct labor costs of the product are misallocated B) direct material costs of the product are misallocated C) indirect costs of another product are misallocated D) direct costs of another product are misallocated

c

22) Which of the following cost and cost allocation base have a strong cause and effect relationship? A) administration costs and cubic feet B) setup costs and square feet C) quality control costs and the number of inspections D) machine maintenance and setup hours

c

23) Comfort Corporation manufactures two models of office chairs, a standard and a deluxe model. The following activity and cost information has been compiled: Number of Number of Number of Product Setups Components Direct Labor Hours Standard 18 6 265 Deluxe 29 12 200 Overhead costs $61,100 $64,800 Assume a traditional costing system applies the overhead costs based on direct labor hours. What is the total amount of overhead costs assigned to the standard model? (Do not round interim calculations. Round the final answer to the nearest whole dollar.) A) $62,950 B) $54,151 C) $71,749 D) $36,929

c

24) Dartmouth Corporation manufactures two models of office chairs, a standard and a deluxe model. The following activity and cost information has been compiled: Number of Number of Number of Product Setups Components Direct Labor Hours Standard 18 9 275 Deluxe 32 14 215 Overhead costs $75,000 $87,400 Number of setups and number of components are identified as activity-cost drivers for overhead. Assuming an activity-based costing system is used, what is the total amount of overhead costs assigned to the standard model? A) $81,200 B) $81,900 C) $61,200 D) $101,200

c

28) Canton's Corp. manufactures two sizes of ceramic paperweights, regular and jumbo. The following information applies to their expectations for the planning period: Cost Pool Overhead Costs Activity-cost driver Materials handling $42,000 96,000 orders Machine maintenance $360,000 16,000 maintenance hours Setups $236,600 45,500 setups Inspections $135,780 21,900 inspections Total support costs $774,380 Production Estimates Production units: Regular = 11,000,000 units Jumbo = 22,000,000 units Machine-hours = 300,000 mh Labor-hours = 600,000 dlh Expected direct costs amounts to $928,000 for the period. Support cost requirements of both products are substantially different from one another. Canton's uses an ABC costing system. The inspections activity-cost driver rate is ________. A) $0.44 B) $5.70 C) $6.20 D) $13.08

c

3) Which of the following has accelerated need for refined cost systems? A) global monopolies B) rising prices C) intense competition D) a shift toward increased direct costs

c

31) The goal of a properly constructed ABC system is to ________. A) have the most accurate cost system B) identify more indirect costs C) develop the best cost system that meets the cost/benefit test D) have separate allocation rates for each department

c

LO #2 4) Refining a cost system involves which of the following? A) classifying as many costs as indirect costs as is feasible B) creating as many cost pools as possible to capture all costs C) identifying the activities involved in a process and understanding how those activities consume resources D) Seeking an easier and more cost effective way to calculate average costs

c

21) Put the following ABC implementation steps in order ________. A Compute the allocation rates. B Compute the total cost of the products. C Identify the products that are the cost objects. D Select the cost allocation bases. A) DACB B) DBCA C) BADC D) CDAB

d

26) Tiger Pride produces two product lines: T-shirts and Sweatshirts. Product profitability is analyzed as follows: T-SHIRTS SWEATSHIRTS Production and sales volume 180,000 units 24,000 units Selling price $20.00 $29.00 Direct material $1.80 $ 5.00 Direct labor $4.70 $ 7.20 Manufacturing overhead $6.00 $ 3.00 Gross profit $ 7.50 $13.80 Selling and administrative $4.30 $ 7.00 Operating profit $3.20 $ 6.80 Tiger Pride's managers have decided to revise their current assignment of overhead costs to reflect the following ABC cost information: Activity Activity cost Activity-cost driver Supervision $97,200 Direct labor hours (DLH) Inspection $164,050 Inspections Activities demanded T-SHIRTS SWEATSHIRTS 0.25 DLH/unit 1.50 DLH/unit 45,000 DLHs 36,000 DLHs 80,000 inspections 16,500 inspections Under the revised ABC system, the activity-cost driver rate for the supervision activity is ________. A) $1.70 B) $2.70 C) $2.16 D) $1.2

d

33) It is important that the product costs reflect as much of the diversity and complexity of the manufacturing process so that ________. A) total costs reflect market price B) value-added costs can be eliminated C) there is high likelihood of cross-subsidizing of product costs D) product-pricing errors are minimal

d

LO #3 7) Activity based costing system differs from traditional costing systems in the treatment of ________. A) direct labor costs B) direct material costs C) prime costs D) indirect costs

d

LO #4 18) ________ costs support the organization as a whole. A) Unit-level B) Batch-level C) Product-sustaining D) Facility-sustaining

d

LO #8 34) Which of the following reasons explain why ABC concepts may be of great value to service companies? A) It allows for more accurate cost accounting for inventory B) It promotes more accurate cost of goods sold reporting C) It helps make financial reporting more accurate D) A significant portion of the cost structure of a service firm is composed of indirect costs

d